Hollinger Corp. 
pH8.5 



UC 267 
.U6 
1919e 
Copy 1 



xNOTKS ()\ .11 H 181 MICTION 



oi- nil-; 



SECRETAHY OF WAR 



TO SirriLK (:().\TUA(.TS, ETC., \M) LSI AE liXSIS 

USED IN doing; so 



SEPTEMBER 8, 1919 




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\>.\SHl^(;lOI^ 

GOVERNMENT PRINTING OFFICE 

I919 



>1 






MEMORANDUM. 



These notes were originally written for the inforniation of the 
members and examiners of the Board of Contract Adjnstment. 
After their completion the writer had the good fortune to obtain the 
suggestions of Goldthwaite H. Dorr, Esq., Assistant Dii-ector of 
Munitions, in the light of which these notes are now revised. 

September 22, 1919. 

2 

o« or -'. 

NOV 2« 1919 



(ONTENTS. 



Pare. 

1. Jurisdiction of the Secretary of War to settle contracts, etc_ 5 

2. The usual basis of settlement 8 

3. The claims settlement organizations of the War Depart- 

ment 14 

4. Jurisdiction of the Board of Contract Adjustment 'i<> 

3 



NOTES ON JURISDICTION OF SECRETARY OF WAR. 



1. The Jurisdiction of tlu' Secretary of War to Settle Contracts and ()\er 
Claims, Doubts, and Disputes Arisin>; Out of War Department Contracts 
Whether Durin>>: Performance or I'pon Suspension or Termination. 

I'lulci- M'clidii .S74I of llu' rnittvl States Ivrvi-rd Statiilc-. t-nu- 
ti'acts must lu> ill writin<r aiul sI^iumI at the end l>y Uoth paitii's. 
This provision is in tlio natuic ol' a statute of frauds ami is for tli,^ 
prot<'ctioii of till' I'nitod States oidy (New '^'ork i^ Porto Kico 
Steauislii|> Co. /•. Tnited States, -j:*.!* I'. S.. ss). Kailure to comply 
with it will not. therefore, prevent thi' I nited Stati's from enforcinir 
the eontrart. The eHret of it is. howe\er. to innnt'diatt'ly divide 
War r)ei)artment contraet^ into two classes, those e.\e( nt<Ml in com- 
pliance with the statute, called formal, and those not so executed, 
oalled informal. With the former are to ho classified those contraels 
which are expressly excepted from the act. These are jjenerally 
all contracts to he |X'rfonned within (U) days or involvinjj |)ayment 
of less than $r>()0 as a total consideration (("omp. Stats, sec. (is."):'), 
a, h, and c. ()S.")4). The distinct i<Mi is further emphasized hy (he 
principle that any a<rreement is invalid unless it he to the interest 
of the United Stativ-> to uuike it. It would seem, therefore, that the 
Secretary of War could not bv a supplemental a<rreement cuih' the 
informality of the contract. The contract was already enfoi-ceahh' 
against the contractoi- and it woidd not he to the interest of the 
I nited States to <:ive him ri<rhts to enh)rce it against the (lovernment 
unless he gave something more in return. For the same reason the 
Secretary of War coidd not >ettle any claims of a conti'actor or make, 
any payments to him under such a contract, whethei- under the ex- 
press terms of the contract or otherwise. Tlie only lights of the 
contractor would se<'m to be to recover on a (plant um meruit for 
propert}' or services actually deli\ered to and acce|)ted by the I'nited 
States. Such imj^lied contracts, it would seem, are not shut otl' by 
Revised Statutes ;iT44 (United States /•. .Vndrews & Co., "JOT V. S., 
229). In order to remedy this disability, whi<h applie<l to great 
numbers of war contracts, the act <d" March li hereafter discussed 
wa.s passed. 

((/) Formal contracts executed in ac<'ordance with section •\'i W of 
the Revised Statutc^s and otherwise'. 

The i)owei- (if the Secretary of War and heads of otlu-i- de|)art- 
nients to make contracts required for tlie exercise and |)erformance. 
of their duties arises by necessary implication and is confirmed by 
statute, and it is held that this power to c(mtract necessarily carries 
with it the power to amend by supplemental contract and to ter- 
minate by agreement in like manner (Corliss Steam Phigine Co. r. 
United States. 91 T". S., 321). Furthermore, this involves power 
nx the Secretary of War to cover in such agreement of settlement a 



G JURISDICTION OF THE SECRETAEY OF WAR. 

cojuplete adjustment of all claims, including unliquidated damages 
that may have arisen during tlie performance of the contract (W. O. 
Burton claim r. United States, in Comj). Dec. 489, and opinion of 
the comptroller of Xoa . -J."), 191S, paragraph 9). It will be noted, 
liowever, that this powei- of the Secretary of War to settle formal 
contracts l)y agreement with the contractor rests wholly upon the 
existence of the contract itself and can not be exercised where the 
contract has been fully executed by performance or terminated by 
breach. In such cases the powers and functions of the Secretary ot 
War to amend the conti'act have ceased and the claims of the parties 
are merely for danuiges for some breach of tlie contract and can 
only be determined by a rourt having jurisdiction. 

The power of the Seci-etai'v of War to contiact is necessarily 
delegated to the chiefs of the bureaus of the AVnr Department and 
by them in turn to certain officers and perhaps civilians selected 
i)y them. AVithout such delegation the functions of the War De- 
partment could not be performed. Such delegations are usually 
by order in writing, but may be by mere oral ajjpointment. The 
power to make supplemental contracts altering the terms of or 
terminating the original contract is also ordinarily delegated to 
the chiefs of bureaus and officers acting under them. Such con- 
tracts may not only curtail or terminate production, but may also 
linally dispose of all (|uestions. including those of unliquidated dam- 
ages, which have arisen under the original contract. 

In all such supplemental or settlement agreements, whether for 
the complete tei-mination of the contract or foi' curtailment, the 
provisions of the contract itself fix the maxinunn amount to be paid 
to the contractor, which amount the contracting officer should not 
exceed unless by reason of unliquidated damages or of some valid 
modification of the contract itself. Otherwise the settlement would 
not be in the interests of the United States. So it is connnonly said 
that the United States can not settle for more than what it would 
have had to pay to complete the contract, and only in rare cases 
can a settlement be justified where the amount ]iaid to the contractor 
equals or exceeds the prospective cost to the ITnited States for the 
additional completed articles less the additional prospective cost to 
the manufacturer in manufacturing the same. Most War Depart- 
ment contracts have termination clauses permitting the Secretary 
of War to terminate the contract and setting forth the basis for 
computing the amount to be paid the contractor. The settlement 
would not be in the interest of the United States and the settlement 
contract would be void if the amount exceeded what might be fixed 
under the method agreed to in the termination clause of the original 
contract. This rule is also subject to the above exceptions as to 
changes pursuant to the terms of the contract, thus increasing the 
cost, and an additional amount to be paid by the United States as 
unliquidated damages as foi* breach of warranty or for failure to 
deliver raw material or components at the times specified, or some 
other cause. Many contracts have so-called change of specification 
clauses. These permit the War Department to change the specifica- 
tions and pi-ovide that the compensation to the contractor will be 
modified accordingly. Under such circumstances the changes need 
not be made in writing under section 8744 Revised Statutes, but may 



JURISDICTION or Tin: SKCKKTAltV OK WAH. 7 

be iiiadi' iiil"oiiiiall\ , a.> tlu'V air act- dom- in the cxiv lit ioii of l!.i' 
tonus of a contiiK t and are not tlu' inaUinir of a new < nntiart. 

(b) Infornial and implied contracts. 

As above stated, the Secretary of ^^'al• had iu> jiirisiliction to mmiIc 
(juestions arisin<r under >ucli contracts, and iiii;:;ht only pay foi prop- 
erty and servi<es actually received and accepted. TJie pressure and 
necessities of the war had. however, caused the niaUin<r of ^ireat num- 
bers of such contracts and this number was >welled by the i ujin^ <d* 
the Com|)tr()ller of the Treasury that |)roxy->i<!:ned contracts were not 
executed in accordance with the [)ro\ision> of section :»7-44 of the 
Revised Statutes. (Opinion of comptrollei- <»f -J.") November, 101s.) 
These j)r()xv-si<;ned ctmtracts had been drawn in the name of .some 
contractin<r oflicer whose name also appeared in the siirnature for tlu' 
United States, but the contract was in fact sijrned i)y another ollicvr 
who added his own name to the sij^natui-e. (iri-at numl)ers of the-^e 
contracts were su>pended shortly after the armistice. .Vnd as the 
contiiU'tors learned that the Tnited State> (oidd not reimlturse them 
foi" their <'osts. unlini-hed woik. nuiterials. unab^orbcd auio!"tization 
of ei|nipment and machinery. et<-.. they brou»rht the matter to tlu' 
attention of ("ou<rre>s. which. aft^M' consideration of a numlu'r of i)ro- 
l)osed bill>. pa»ed the act of March 2. 15»llt, .sometimes calli'd the Dent 
Act. This act authorizes the Secretary of War. under certain limita- 
tions, to " adjust, pay. or discharfre " such agreements, whether ex- 
l)i-e>s oi" implied. '* upon a fair and e<|uitabl(' lia-^i-."' I'nder this 
act the Se<ri'tary of War exercises, in M)me I'opects. a wider jiirixlic- 
tion in the adjustment »d" contract> not properly executed than in the 
ease of contracts which have l»cen executed in accordance with the 
terms of the statutes. For example, he may make adjustments oi such 
improperly executed contracts whether the same have been completed 
in whole or in part, and ndght therefore adjust a <|ue>tion of mi- 
liquidated damages on an informal contract which had been entirely 
comi)leted. Furthei", his jiUMsdii-tion is extended to the adjustment of 
contracts not executed in the uiaum*r prescribed liy law made by other 
agencies of the (ioxcrnment acting under the authority (d" the Picsi- 
dent. On the other hand, claims uuist be filed before dune 1)0. liUO. 
The original agi'eement must lia\e been made bcd'oi'e November 12. 
191H, and expendituro mu>t have been made, or oliligatious incurred 
on the faith of it before that date. Prospe<tive or anti<-ipated profits 
may not be allowed but "a reasonable remuneration for expemlitnres 
and obligations or liabilities necessarily incurred in perfonning or 
preparing to perform " may be given. The word " remuneration *" is 
construed to have a much wider meaning than reimbursement an<l to 
include compensation. Theic is also a clause i-harging the Secretary 
of Wm with especial res|)onsibility with regaid to claims of subcon- 
tractors under >uch settlements. None of these liiiiitati(»ns. however, 
apply where the contract is one with a foreign go\ernment of a na- 
tional thereof except that the contract must have l)een made before 
November 12, 

It would seem also that this act permits settlements on a wide ba.sis 
under implied contract. It purports to cover "'any agreement, ex- 
press or implied ''■' that has been entered into in good faith 
* * * and * * * jjjjj^ j^^j been executed in the manner pres- 
cribed bv law." It would seem that under it the Secretarv of War 



8 JURISDICTION OF THE SECRETARY OF WAR. 

inay on the deteniiination that a compulsory order, purporting to be 
issued under section 1'20 of the national defense act of June 3, 1016, 
was not properly issued, settle the various elements of expense, un- 
absorbed amoilization, etc., in like manner as in case of informal 
express contract. This is because the in^•a]id compulsory order has 
required production by the claimant like a coutract and thus has 
similiar elements of costs and expense arising out of preparation to 
perform, etc., and gives rise to an implied contract because the United 
States has by its proper officei- and under authority of la^^■ induced 
the contractor to do all these things and received the benefit. 

It will be seen that where contracts have been executed in the 
manner prescribed by law, this jurisdiction of the Secretary of War 
depends entirely upon his right to make suplemental or amending 
contracts. It does not, therefore, trespass at all on the jurisdiction 
of the courts. Tlie Secretary of War has to determine what financial 
arrangements he will make and what disposition of property he will 
make in his suplemental contract of settlement, and if he makes this 
determination by applying rules of law and uses semijudicial meth- 
ods, that will not make his act a judicial one nor an infringement on 
the functions of the courts. And for the same reason the making of 
these determinations by him are not in conflict with Compiled Stat- 
ute 368, which reads as follows: 

Ail claims ami deinamis wluitever by tlie United states or ajiuiust them, 
and all accounts whatever in which the United States are concerned, either 
as delators or as creditors, shall he settled and ad.iusted in the Deptirtnient of the 
Treasni-y. 

The settlements of the Secretary of War under the act of March 
2, 1919, are administrative acts within his express authority under 
that statute, and are not an exercise of judicial power, or in conflict 
with section 368 of Compiled Statutes above quoted. 

2. The Usual Methods and Basis of Settlement. 

It may generally be said that where a contract contairis a termina- 
tion clause, setting forth in itself the basis of settlement, the Secre- 
tary of War may not make a settlement more favorable to the con- 
tractor than that permitted by the termination clause. For if he 
did so, it would not be in the interest of the United States. The ex- 
ceptions to this are where the amount of the settlement is increased 
by reason of additions or amendments or changes to the contract, 
or by reason of unliquidated damages caused by a default of the 
United States. 

Where, therefore, the contract contains a ternunation clause of 
this character, the basis of adjustment set forth therein is almost 
invariably followed unless some arrangement more favorable to the 
United States can be negotiated. This rule would, it seems, apply 
both in case of formal contracts and to informal contracts settled 
under the act of March 2, 1919. 

Where, however, there is no" termination clause, or the same does 
not set forth any basis of settlement, the Secretary of War may ar- 
rive at any amount to be paid the contractor in his discretion. But 
for convenience and to secure uniformity, certain rules have been 
set forth in Supi)ly Circular No. Ill, of November 9, 1918, and again 
in Supply Circular No. 19, of March (>, 1919. These rules apply both 



JURISDICTION or THE SECKKTAKV Ot WAR. 9 

to formal ami informally executed contract settlements ;ui<l aUo 
wherever the termination clauses of contiacts permit, ami arc stated 
in the latter circiihir, as follows: 

Sn-tion .1. — Foi- raw iimterijils, flirt-cr and imliifri. aii<l < .>iii|M»Mt'iii parts mi 
liarid, in an anmuni n..t k-xivtMlin^,' ilu* nMiuiifni-nts Inr |Iih ciinipleliiMi of tin- 
cnntract: Cost -pins itiwanl liandliiiir cliar^'cs pins sndi portion of ovorlirad 
as is appiiniltl<> ii-ss sndi snnis as may represent tiic fair a5rr»-pd valnt- of ail or 
an.\ iMirtion tlicicol, il tlw til!<' and possession of tjir sanu- are rctaiiwd !•> 
tlu" conirartor. 

Srcfion It. — For articles in process, in an amoinit not oxcecdin^' the reqnire- 
nieiits for tlu' completion of the contract: Cost of raw material and labor pins 
snch portion of ovt'rhead as is directly apjilicahle, less such sums as may rejire- 
s^nt the fair a;;ree<l valuo of all or any portion thereof, if the title aud ix)s.ses- 
siou of the same arc retained hy the contractor. 

Section r. -A fair and e<initiiltle remnneration ;1) for expenses and services 
of the contractor in coinuHtion with the items included in Section A of this 
article, but not to exceinl interest at (» per <-ent i>er amium ou the capital in- 
vested therein, or if the c;ii>ital was borrowed, interest at the rale paid by the 
contractor; and C2) for expenses and services of the contractor in connection 
with the items included in Stxtion H of this. article, but not to excee<l 10 per 
cent of the cost thereof. 

Section I). — Such amoimts as are properly paid by the contractor iti the ad- 
justment and termination of unperformed subcontracts and unperformed coui: 
mitmeiits for siii>plies which were ju'operly eidered into or made in <onnection 
with the iterformance of said original contract. 

Section H. — Pay rolls and expenses paid or incurred with the approval of (he 
contractiuix otlicer. or proiierly iiaid or incurred without such apjiroval for the 
cu.stody and jtrotcction of iiropeity, since the date <»f suspeiisiou above recited 
and pendinj^ linal settlement. 

Sc<-litin I'. — -Where sfiecial facilities were pntiterly provided in coimkmI ion willi 
the performance ()f the oriirinal contract, necessity of which was contemplate<l 
by the contractor and included in his estimate of cost at Mie time the ori'.'inal 
contract was ma«le. such ixution of the cost thereof as would reasonably have 
been recouped had the unco)n|>leted iKU'tion of the oritrinal contract been per- 
formed. The amount .so allowetl shall not exceed a sum which shall be com- 
puted as follows : 

From the cost of such spe<-i.il facilities deduct their fair value at the date 
hereof, aud state suih portioii of the remainder .-is is represenltnl by Ihe 
ratio of the uncomplett^l portion to the whole of the ori;:inal contract. 

Section <l. — Such additional sums, if any, as the StK-retary of War may deem 
necessary, fairly and Justly to comiiensate Ihe contractor for expeuditun»s, 
obligations, and liabilities iiecessjtrily incurnnl, iucludiufj work, labor, and 
service necessarily rendere^l, under the ori^iaal contract or in jireparatiou for 
the i)erformance thereof, or under this supplemental agreement. 

It will be observed that the whole method of settlement is ha cd 
on costs and not on ratios of proportion of completion to the contract 
])rice for finished work. Thus all element of anticipated profit is e.x- 
chulcd. In this respect the .settlement may be said to be les-; favoral)]e 
to the contractor than a judoment for dama^res for breach of contract 
woidd be. It is in fact, however, much more favorable than litiiration 
of so ^eat a number of claims a^ain^t tlie United States would l)e 
with the conse(iuent delays l)oth in reacliino a judgment and in ob- 
taininof from Conirress the ai)i)ropriation to |)ay the same. 

The above-quoted panig:raphs cover a numl)er of items under each, 
and .some of these items recjuire comment because of the especial 
methods of apply in": them in use in the War Dejjartment. 

The rides for cost accountinfr in the "War Department are set forth 

in Supply Circular No. 126 dated December 7, 1918, and these are 

applied so far as practicable in workinof out all .settlements. The 

following: notes on the basis of settlement as set forth under sections 

140773—10 L' 



10 .irRisnicTiON of thk secuetaky of war. 

A to (t al)()ve are for the most part applications of these cost prin- 
ciples. 

Direct iDater'tah and their cost are defined as raw materials and 
component parts pnrchased for use in and entei'ing into the articles 
contracted for. The cost of direct materials is the net cost to the con- 
tractor, i. e., invoice cost, less cash, trade, and quantity discounts, 
plus duty, import expense, freight, and drayatre paid hy tlie con- 
tractor. 

Such materials should be on liand and paid for by the contractor 
or sliould liave been invoiced and the contractor obligated to pay for 
them. They must not exceed in (}uantity an amount reasonably 
necessary to complete the contract but may include sufficient allow- 
ance for spoilage and overage. To this will be added the proportion 
of contractors' overhead and general expense directly applicable, and 
also interest on the tottil cost thus ascertained including the over- 
head at 6 per cent per annum, or if the material, etc., had been paid 
for with borrowed money then at the rate of intei-est of the loan. But 
if the completion of the contract would have resulted in a loss the 6 
per cent sliould not be allowed at all. 

If the contractor keeps the materials, and this is generally desired 
by the Secretary of War, their fair value as agreed to at the time of 
settlement will be deducted from the aboAe total. 

For convenience overliead is discussed under a separate paragraph. 

If these materials have already been paid for in whole or in part 
by the United States, the amount of the claim and the basis for fig- 
uring the C) per cent will be modified accordingly. 

Indirect 'materials are supplies, perishable tools, and materials not 
entering into the articles contracted for but used in connection with 
their production. 

The mode of ascertaining cost and the basis and rules for settle- 
ment are the same as in case of direct materials except that where in- 
direct materials are made by the contractor himself it is customary 
to allow a 10 per cent compensation as if they wx're articles in 
process. 

Such materials are generally of use in the commercial business of 
the contractor and are in their nature more like equipment. There 
is, therefore, much stronger reason to require the contractor to retain 
such materials, which is generally done. 

Direct labor is the wages paid for labor performed upon and 
chargeable to the work contracted for. These wages should not 
exceed the rate of wages then being paid for the same work in the 
locality, and should in general conform to the necessities of each 
particular situation. Overtime allow^ances in excess of the flat rate 
are generally charged to " Operation overhead." 

Such labor must have been performed on the partly finished direct 
materials entering into the settlement, or upon direct materials the 
property of the United States, upon which, pursuant to his contract, 
the contractor is having work done. 

Articles in process are the direct materials upon Avhich direct labor 
has been applied in such manner as to modify or assemble them. 
Here the rule applied is to ascertain the cost of the direct material 
in manner above stated, and to add to that the direct labor expended 
thereon, the cost of indirect materials \ised. the overhead and gen- 



.1 riMSKKTiO.N <i|' rilK SKCHKTAUV OT WAi;. 11 

••nil expense' direct ly aj)[)Iie:>ble, and on thi.-> to li<;iire and add a flat 
10 per cent compensation. If the direct materials l»eIon<:ed to the 
United States that item wouM he omitted. If the c(jntract were a 
losin<r contiact this item of 10 per cent shonhl not be avowed. 

If the contractor retains tlie articU\s in i)rocess, and it i.s jjenerally 
desired that he do so, their fair vahie at the time of settlement shonhl 
he deducted from the co.st ascertained as above. 

The articles in process tojrether with direct materials not in [)rocess 
may not exceed an amount leasonalily i-erpiired to complete the con 
tract |)lus an allowance for >|)oila^e and overaire. 

Operation ovvrJuitd is detined to include the pro rata share of all 
indirect expenses whicli inure to the partiiular contract and which 
are 1)V theii- very nature attributable immediately to production 
rather than to administrative and general expeii.se. 

It is understood to include .salaries and wa<res paid to sui)eiin- 
tendents, foi-emen. and clerks, overtime cost of direct labor, cost of 
labor not expended directly upon tlu' product or in the performance 
of the Avork conti'acted for but required to l)e performed in connec- 
tion with the |)roduction of the article contracted for. upkeep of the 
operating- plant. de|)reciation. taxes (other than Federal war jjrofits. 
excess profits, and income taxes), insurance. i)ower. futd. buildin<r 
maintenance, current rej)airs, etc. 

Repairs and alterations allowed as overhead are ordinarily only 
tho.se made currently to jirovide for the ordinary and I'c^ndar upkeep 
of the ])lant. Those of a ^eneial nature necessary only at intervals 
of nioi'e than a year oi* replacenients and unusual repairs which 
would in\()lve a si<>:nificant increase in the overhead expen.-e, arc not 
ordinarily considered as char<j:eable apiinst the United States. 

Insurance is confined to that on the contractor's property and 
liability as distinjrui.shed from (lovernment property. But in ca"-e 
the contractor carried his own insurance such expense shall not 
include a i)rofit to the contractor and shall not exceed in cost the 
rates char<2:od by insurance companies for similar insurance less com- 
missions or ac(|uisition expense. 

Kovalties are not an item of oxcrhead unless allowed by tin* con- 
tract "it-^df. 

Rentals and iiiterot are not ordinarily coiividcii'd iti'uis of cost. 
l)ut rather to l)e a part of tlie profit or to be j)ai(l out of i)ront. 

Adni'/iiifttrafirc und (/<ii< raJ cr/xiif^' include^; the pro rata ^hare of 
all expense necessary and incidental to the administrative and <ren- 
eral office activities of that ]iortion of the contractor's business 
devoted to and nece-sary for the fulfillment of the contract. 

The United States, luiless the contract expi-e.-sly provides to the 
contrary, assumes that the contractor has an office or;_ranizat ion and 
capital adequate to the performance of the contract. There is. 
therefore, generally excluded from cost the interest on investment 
or on bonded indebtedness (wliich is siipposed to be paid out of 
])rofits and to be a part thereof), advertising expenses, losses on bad 
debts, collection expenses, subscriptions, and other expenses not ap- 
plicable to the contract. On the other hand, there is included such 
items of expenses incidental to the administrative and general activi- 
ties of the business (in so far as the same are properly chargeable 
(o the performance of the contract) .as resonable salaries of execu- 



12 



JURTSD[('TION OF THE SECRETARY OF WAR. 



tives, engineers, draftsmen, •md office employees, taxes (other than 
Federal Avar profits, excess profits, and income taxes, and other 
than those already allowed under operation overhead), stationery, 
telephones, traveling, etc. The test, as in the case of operaticm 
overhead, is from direct benefit to the performance of the work con- 
tracted for. 

These items of administrative and general expense, like those of 
operation overhead, enter into the settlement so far as they are ap- 
plicable to the direct and indirect materials and work in process as 
above indicated and may also enter in the ascertainment of other 
items herein mentioned. 

Commitments are the sums paid by the prime contractor to sub- 
contractors or material men in settlement of their claims against 
him for terminating their contracts. These become items of cost 
against the (Tovernment and may properly be allowed when they come 
within Avhat the subcontractor might reasonably have recovered 
against the prime contractor in a court having jurisdicticm. They 
are, of course, limited to the subcontracts required for the per- 
formance of the prime contract. Every effort is, however, made to 
settle subcontracts on the same basis and principles as prime con- 
tracts, and this is very generally accomplished. 

Unahsorhed amortizatwn. — There are a number of costs incurred 
by the contractor for the performance of the whole contract and 
which are wholly or in part to be amortized over and in the price 
to be paid by the Government for the finished articles. The theory 
in these matters is to find out how much of the cost is covered in 
the unit price of each item and then to pay the contractor that 
amount multiplied by the numl)er of items delivery of which was 
not made nor paid for because the contract was suspended by the 
action of the Government. Some such costs are : 

(«) Facilities and eqidpTnent properly provided for the perform- 
ance of the contract and the necessity for which was contemplated 
by the contractor and included in whole or in part in the price 
fixed in the contract. Here the amount to be amortized in the con- 
tract is for convenience, in the absence of exact information, ascer- 
tained by deducting from the total cost the fair value at the time 
of settlement, and the United States is then charged with such 
portion of the remainder as the uncompleted portion of the con- 
tract bears to the whole contract. Under this head come buildings, 
machinery, etc. But this allowance can in no case exceed what the 
contractor would have recouped as amortization had the contract 
been fully executed and completed. 

{})) Experimental vork and fees of e.i-perl ndeisers. — These 
initial costs are frequently necessary to successful production and 
are charged into the price of the finished articles. The amortization 
not absorbed because of the stopping of ])roduction under the con- 
tract is a proper item of cost to be paid by the United States. 

(c) Cost of plant rearran-geinent before and sometimes after com- 
pletion of the Government contract, if contemplated at the time 
the contract was made and included in the contractor's estimate 
and unit price charged the Government, is to be apportioned in the 
same manner as experimental work, etc. 

{d) Special tools adapted solely to the pi-oduction under the con- 
tract and applicable to the whole contract, are to l>e considered like 



.iri:isi)i<Ti(>\ OF TFiK ?<K(Rkt.m;v ok wai;. 13 

facilities or ('(jiiipiiiciit and the tmahxirlxMl aiiioiti/.ation i)ai(l l)y tin* 
Govornnieiit in like manner. 

On all these items of unabsorhed amortization it is to be noted 
that if the costs were not contemj)lated before the contract was 
made and, therefore, were not in whole or in jiart included in the 
contract price, theie is nothinji for the (lovernnient to pay. For, 
if the cost was not included in the contract j)rice, the loss of the 
opportunity to perform the balance of the contract will not, as to 
these items, afVect the j^osition of the contractor. lie would not have 
recouped them in any event. The cost of machinery, etc., found 
necessary and piovided by the contractor after the contract has been 
made, is not, therefore, char<reablc a^^ainst the United States unless 
under the ])rovisions of the contract or of an amendment. 

All such costs, the subject of amortization, must have been reason- 
ably appropriate for the work of performin<j: the contract and not 
in excess of its rc(|uireinents, and the prices at which the contractor 
obtained the facilities or e(iuipment or advice, etc., must have been 
such as mijrht reasonably have been paid at the time and under the 
circumstances. If they were excessive only such part may be con- 
sidered as was reasonable. 

Difficulty sometimes arises where the contractor has successive 
contracts for the same product and at the same or higher price 
and uses the facilities, etc., provided for the first contract. In such 
cases it is safest to assume that these were fully amortized in the 
fiT>;t contract and not to allow unabH)rbed amoitization in settling 
tlmse that follow unless it is clearly shown that such amortization 
was actually made in fixing the prices for both contracts and was 
intended from the beginning to extend over more than the first 
contract. 

Other itciii-s of cost not xubjert to he anwrtizcd. — (a) Increased 
cost of operation at the beginning of ])roduction which would have 
l)een overcome by the gi-eater efficiency of operation in the later stages 
of the contract. This item only remains a cost so long as it results in 
an actual loss and to the extent of such loss. If the contract has \nu- 
ceeded far enough before suspension for subsequent more efficient 
production to balance off the losses previously made, then there is no 
item of cost remaining to be paid by the United States. 

{h) Then there are the items of exjxMise and cost covered by Sec- 
tion P] above (|iiote(l, being for the i)rotection and care of property. 

ie) There are also costs imposed on the contractor by the failure 
of the I'^'nited States to fully jieiform on its part and which shouhl 
be reimbujsed to the contractoi'. Thus, foi- example, where the United 
States had madi' a contiact for --hells and was to fuiiii~~li the billets to 
the contractor in accordance with certain specifications, ([uality. hard- 
ness, etc. The United States, however, finiiished billets which are 
harder than the specifications call for and the contractor is put to 
extra expense to obtain additional machinery to anneal the billets 
before machining them, and does so: or, where the billets furnished 
have an unusuallv large pi-oportion of latent defects, causing the 
contractor to machine many more billets to produce the recniii-ed 
number of shells than was originally contemplatetl : or, where the 
United States in a contract for copper bands, in which it agrees to 
furnish to the contractor all the copper required for the perfoiinance 
of the conti-act ha^. nevei'theless, failed to furnish the so-called ve- 



14 JURISDICTION (»F THE SECKETAKY OF WAR. 

hide copper and has furnished the contractor only, pound for pound- 
the weight of the finished bands; or, in ease the United States has 
through some action prevented the contractor from employing over- 
time labor or working on Sundays and such labor was contemplated 
at the time the contract was made. 

Such items are generally in the nature of unliquidated damages 
and, where the contract has not been terminated by a complete per- 
formance or by breach, ma}' be included under the settlement. 
Where, however, the contract has been completed or terminated b.v 
breach such items may not be paid or settled by the Secretary of 
War unless the contract be an informal one, and the settlement to. 
be made under the act of March 2, 1919, In the latter case the act 
appears to be wide enough to permit settlements and awai'ds by the 
Secretary of War even inider such circumstances. 

Other co'mpensation may be awarded under section G above quoted 
and which is sufficiently broad to cover unforeseen circumstances aris- 
ing in particular cases as well as many of the items of cost above 
enumerated and commented on. Where the application of the above- 
stated basis does not give the contractor reimbursement for his ex- 
penditures and a fair compensation for such of his services as have 
not resulted in completed product, section G is applicable. It can 
not be used, however, to put an inefficient or improvident contractor 
in a better position than he Avould have been in had he completed 
the performance of his contract. 

Exceptions to the above outlined Ixi^h. — There are classes of con- 
tracts made by the Quartermaster or Director of Purchase where 
the method of settlement has been on the basis of certain unit 
allowances which were established in agreement with groui)s of con- 
ti-actors producing certain classes of commodities. The apjilication 
of these allowances is believed to secure sul)stantially the same re- 
sults as the aboA'e outlined basis and to make for econiomy in time 
and effort. 

3. Contract Settlement Organizations of the War Department. 

The armistice found the War Department, under the terms of 
contracts, formal and informal, obligated to the industry of the 
country for a production which, under the new circumstances, was 
far in excess of the military needs of the Xation. To have continued 
this production would have meant not only an improvident waste of 
Government funds, but of materials and labor which were urgently 
needed in the reconstruction of our commercial life. The innnediate 
problem was to determine what curtailment in production under 
ihese various agreements could be made which would accord with 
the revised military needs and be consistent with the smooth shifting 
back of the industrial nuichinery to a connnercial basis. Boards 
were set up in each of the bureaus to review each of the outstanding 
contracts and to determine what curtailment of production was, 
mider the circumstances, wise. These boards having made that de- 
termination, the next question for decision was as to the method 
to be used in effecting this curtailment. Two courses were open. 
The Government could notify the contractor that it would refuse to 
i-eceive any articles under the outstanding contracts beyond the 
limits of the proposed curtailment of production. Such a refusal^ 
Avould constitute a breach of contract and throw the adjustment of 



.1 nil.SDll Tl().\ Ol' TliK SKCltl/IAKV or WAH. 15 

any rifrhts whicli the contractor iiiifrht liavc, both for i'Xi)eiulitiiies 
mukU' ill prt'i)aiatioii for the ciiitailiMl portion of the contiact and 
for anticipated prolit-. into the C'onrt of (Maims. Snch a coni'se 
wonid ha\-e rt'snhed in \vi(k'sj)read in(histrial hardship and have in- 
volved a wholesale repudiation (d' oldipit ions, which the departnient 
could not contemplate. 

The other course was to attempt to nejiotiate amendment.s to the 
oxistinjj; contracts which would provide for the desired cJirtailment 
of i)r{)duction and, at the same time, reimburse and remunerate the 
•contractor on a fair basis for those pre|iarations whicli lie had made 
for the i)ro<luction of tlio.se articles which. undi>r the revised term.•^ 
of the contiact he was not to complete ami deliver. The negotiation 
•of the.se amended or supplemental contracts was naturally a func- 
tion of the same bureaus which had ne.irotiated the original con- 
tracts, and those boards in the various bureau> which had been 
charged with the duty of deterniinin<r what curtailment of produc- 
tion was desirable were further chargeil with the duty of neirotiating 
new sui>plemental contracts providiiiir foi" such curtailment. 

It was desired that tlTn worU l)e a])proached by both c()ntractors 
and bureaus with the >ame >i)irit of coopi-ration which had animated 
the de|)arlnieiit and contractor^ in the making and execution of the 
original contracts, so that thi.s final chapter of the war-time rela- 
ti<)ns of industry with the (iovernment would be iinimated by the 
same fine spirit wliicli jiad characterized tho.se relations to such a 
prevalent degree during the strenuous days of hostilities. It was 
'deemed important that the woik of negotiation of these new con- 
tracts l)e carried on while tliose who were familiar with tlie history 
of the making and |)roduction under tlu^ contracts were still avail- 
able in the service, and to this end olliceis and civilians who had 
been eng:',ged in the work of |)rocurement. |)rodui'tion. and inspection 
directed their eiieigies toward working out a soun<l and fair basis 
for sup})lemental contracts curtailing production. 

These contra(ts oi- statutory awards are execuleil. the former bv 
the contracting oftii er and the claimant and the latter by the district 
board and the claimant, but they are by tlieir terms expressly sub- 
ject to the approval of the bureau b-oards and iii the case of statntoi-y 
awards also by the War Departmciu Claims lioard. hei-eaftei- 
described. The wliole lecord is thcreaftir tiansmitted to the bureau 
hoard, which in turn reviews the whole settlement on the record, 
including computations, xaluatioiis oi- appraisements, a determina- 
tion whether all the regulations of the War Department and of the 
comptroller and tlie law liave been followed, etc. It may then ap- 
prove or disapjjrove the settlement. If it approves, then the record 
is filed and the settlement contracts or statutory awards, after exe- 
cution, are distributed to the aj)pi-opriate ])laces for record or pay- 
ment, one being .sent to the district hoard, one to the claimant, 
another to tlie disbursing olHcer. another to the Auditor foi- the War 
Department, and. in case of settlement contracts, one to the returns 
office. If disap])roved it is returned to the district office for cor- 
rection and to endeavor to arrive at and negotijite the new settle- 
ment with the claimant, or the bureau board may itself undei"take 
the negotiation. There are also provisions and special forms for 
making ])artial payments to claimants before the final adjustment, 
either on items of claim proved or on a percentage of the estimated 



16 JURISDICTION OF THE SECRETARY OF WAR. 

miniiiuuii total award less debts due the United 'States. These 
forms and papers for partial payments are usually accomplished in 
the districts without reference to the bureau boards for approval, 
and this is permitted, because the whole settlement, including the 
partial payments and the items on which based, is ultimately sent 
to the bureau board in any event for review on payment of the final 
amount and the execution of the final settlement contract. 

A typical set of regulations and forms for such bureau settle- 
ments is to be found in Ordnance Claims Board Circular 74, which, 
it is recommended, should be obtained and studied. 

Some of the bureaus have established especial boards to operate 
on claims on certain groups of contracts, as, for example, the nitrates 
board of the Ordnance Department. These function as district 
boards. 

The bureaus with more limited numbers of contracts do not gen- 
erally operate through district organizations. The bureau board 
itself in such cases conducts the whole investigation and negotiation 
and makes the award and settlement contract subject to the approval 
of or, if a statutory award, execution by the War Department 
Claims Board member assigned to that bureau. 

Where for any reason an agreement can not be reached by the 
district within the limits of the regulations the case goes, first, on 
appeal to the bureau board and, if no agreement is reached there, 
then, on further appeal, to the board of contract adjustment. 

The boards which were charged witli the duty of determining- 
what curtailment of production was desirable and in negotiating 
contracts for such curtailment came generally to be known as 
claims boards. One such board was set up in each bureau. The 
Ordnance Department Claims Board was established as early as 
November G, 1918. In certain of the bureaus, as in the office of the 
Director of Purchase, and in Ordnance, it was necessary, if this were 
to be done efficiently, to further decentralize their activities; and in 
these bureaus, the Ijureau claims board became a reviewing board, 
while the actual negotiations for the new contracts were carried on 
in the case of ordnance by claims boards established on November 
•26, 1918, in each of the ordnance districts into which the country was 
divided; and in the case of purchase, by claims boards in each of the 
supply zones into which the country was divided. Of these district 
boards, the district chief or zone-supply officer was made chairman; 
a prominent business man of the district was generally made a mem- 
ber of the board, and to it was attached a lawyer. The existing 
personnel in the district or zone was coordinated to assist in the 
work. This personnel had been engaged during the war in activi- 
ties of inspection, acccounting, finance, expediting production, etc., 
and contained the best available material to check and examine the 
statements submitted by the contractors on prescribed forms as to 
the expenditures and commitments which they had made in prep- 
aration for the curtailed portion of the contract and the other ele- 
ments which they claimed ought to be taken into consideration in the 
negotiation of the new contract with them providing for the curtail- 
ment of their production. This personnel was formed into groups 
under the leadership of officers or civilians designated by the chair- 
man of the board, and these heads, with their principal assistants, 
are usually known as the staff. 



JURISDICTION OF- THE SECRETARY OF WAR. 17 

The ili.^ti'ict or /oiu* board, or the bureau elaiins board in tbox- 
bureiiii> where there are no loeal boartls, makes a comph'te dettMiui- 
nation as to the facts stated by the contiactor an<l embodies its fin<l- 
ings in a eon<h>nsed statement, <renerally on a |)rescril)ed form, 
known as an awaid. This award, when assented to by the eon- 
tractor, becomes tlie basis for the settlement or >iii)i)h'mental con- 
tract: or, where tlie contract is not executed in the manner pic- 
scribed by hiw, for the statutory award under the act of March "i. 

Reference has been made above to tlie Wai- l)e[)artnient chiims 
board. This board ai-ts under the presi(h'ncy of the Assistant Secre- 
tary of "War. who. as Dii-ector of Munitions, has su])er\ ision and 
direction of tlie whole suj)ply sy-tem of the Army and conse(|uently 
of all conti'acts and (|uesti()ns lelatiiifj thereto. This board was <2:i\en. 
by Circuhir Xo. "Jt") of the War Department, dated January '20. l*>li>. 
power ''to suix'ivise and coordinate the work of the various ^^'ar 
Department agencies enp^aged in the settlement of claims resultin<r 
from the termination of contracts or other procurement obli<rations 
of the department cxinsecjuent upon the suspension of hostilities and 
to authorize and a})pi"ove such settlenuMits." All settlement contracts 
ne«rotiated by the bureaus, before they can beconu' effective, must 
be approved by this board or one of its members designated for the 
purpoM'. T'pon the passage of the Dent Act. the powers of the Sec- 
retary of War to adjust, pay. and discharfje the afrreements covered 
by that act, so far as they related to contracts made in the United 
States and Canada, were deleofated to the AVar Department claims 
board by General Order No. 40 of March 10. l'.»10. and all statutory 
awards made under this act are made in its name by the board or 
by one of its members authorized for that |)urpose. The actual 
consideration of settlement contracts and the makinp: of statutory 
awards are. except in special cases, cai-ricd on by specially desiirnated 
memlters of the board, who sit with the bureau claims boards, the 
board, as a whole, confininfr itself ordinarily to the determination 
of questions of policy and the supervision of the administration of 
various agencies of the department engaged in contract settlement 
work. 

In administering its powers under the Dent Act, the Wai- Depait- 
ment Claims Board makes use of the bureau and local hoards in the 
negotiation of prop()S<»d statutory awards and has also delegated 
important parts of its jurisdiction to the Board of Contract Ad- 
justment. 

The Board of Contract Adjustment was organized on November 
6, 1918, in order to meet requirements for a boai-d that would per- 
form the functions provided for in the standard form of contract 
required by Supply Circular 88, 1918, in the determination of ques- 
tions of doubt and of other incidental question- arising during the 
performance of contracts. It was intended that this board -hould 
relieve the Secretary of War from the determination of many per- 
plexing questions which would otherwise be submitted to him. It 
was planned to have it composed of men drawn from civil life, of 
high standing in their communities, and whose views would com- 
mand the confidence of contractors and make them feel that theii- 
rights under their contracts were being considered in a broad and 



18 JURISDICTION OF THE SEOKETARY OF WAR. 

business-like fashion by men who had been aecustonied to dt-al with 
similar important questions in civil life. 

After the armistice, when the work of negotiating new contracts 
was imposed upon the department, it was immediately felt that the 
Board of Contract Adjustment would be a useful agency in passing 
upon the terms of proposed supplemental contracts where the ne- 
gotiating bureaus and the contractor could not come to an agree- 
ment as to the terms of the new contract. Consequently, it was pro- 
vided that, where the bureau board and the contractor are unable 
to come to an agreement, the contractor nuiy appeal to the Board of 
Contract Adjustment for a re^'iew of the proposed terms of the 
settlement contract. If the Board of Contract Adjustment is in 
agreement with the views of the bureau board, and its position is 
sustained by the Secretary of AVar on a submission to him for re^ 
view, then, unless the contractor is willing to make an adjustment 
upon that basis, the original contract is breached and the contractor 
relegated to his rights in the Court of Claims. In the event that the 
Board of Contract Adjustment finds that a supplemental contract 
ought to be )nade on terms other tlian those pi'oposed by tlie bureau 
board and objected to by the contractor, the matter is sent back to 
the bureau board for the making of a supplemental contract along 
the lines outlined by the Board of Contract Adjustment. 

A similar appellate jurisdiction from the action of the bureau 
boards with reference to Dent law awards was delegated to the Board 
of Contract Adjustment by the War Department Claims Board, and 
it was also given an extensive original jurisdiction under that act 
which will presently be described. 

The other principal l^oard of the War Department for the settle- 
ment of claims is the War Department board of appraisers con- 
stituted by General Order No. 30, of April, 1918. This board has 
the function of determining amounts due for property comman- 
deered or requisitioned under the national-defense act of June 3, 
1916, section 120, and the food-control act of August 10, 1917, section 
10, and may also by award in advance fix the amounts to be paid for 
work and property received under compulsory oi'ders under the same 
acts. To it are referred also claims relating to real estate under 
the act of March 2, 1919. (See resolution of AVar Department Claims 
Board meeting No. 23, held Mar. 18, 1919.) 

In settling the claims of contractors it usuall}^ becomes necessary 
for the district or bureau board also to take part in or check up the 
settlements made by the prime contractor with his sub-contractors. 
This involves a great number of determinations by district boards 
generally greatly exceeding in number the prime contract settle- 
ments. However, as these subcontractors have no contractual 
relations with the United States, the basis for such settlements is 
not so prescribed and the approval of these settlements by the bureau 
boards is not required. Such subcontract settlements may be ap- 
proved by the district boards where they are within the limits of 
the amount which the subcontractor would rex?over from the prime 
contractor in an action or suit in court. 

An idea of the work performed by all these boards and the man^- 
thousands of officers and men and Avomen they employ may be gained 
from the fact that about 21,800 War Department contracts had been 
settled by them U]i to August 31, 1919, for an aggregate sum of 



JURISDICTION OF THE SECRETARY OF WAR. 19 

about $272.78(5.000, and ihal an (-liiuali'd uiiiuber dI' about ."),00<J 
claims amounting to al)out $800.(M)0.00(J then leinained to be settled. 
The settlements above made were at an average of V] \wv cent of 
the amount which (he Ignited States would have been obli<:jatetl to 
pay had the then unperformed uart> of the contracts been complet^nl. 
Other claims to a lunited iiumnci- i-omini; before the board of con- 
tract adju>lnieiit undei' tlu' act <if Mai't-h 2, l»ased on a<;reeMU'nts 
made by ollicers or others actinjr un«ler the authoiity of the Proident 
are not here iuchided. 

LIST OF BOARDS SI I'ERVISING AM) PASSING I I'ON THE ADJUST- 
MENT OF CONTRACTS IN THE WAR DEPARTMENT. 

Will' I ))>|i:ii-tiii<'iil <'l;iiiiis r>ii:iril. W'asliiiii^toii. I >. ( '.. .Miiiiil ions I'.iiihiiii;;. 

I'.ojinI (it Cniitinit Atl.iustliieiit. Tweiilielli aiiil C Strt'cls NW. 

Will- I »i'ii:iriiiii'iM I'.iiard of A|)praisers. .Miiiiiiioiis I'.iiililiiiLr. Wasliinirton, 
1>. C. 

Oi-(lii}inre Chiiiiis lioartl. Wai- I »f|iar(iiH'iit. Washiiiulnii, I >. < '. 

Claims Hoard. Air Scrx ice. War I >e|iartineiil. Waslijimiun. 1 ». ( '. 

Claims Hnaril. <'licmi<al Warfare St-rvii-c. War I >i'i>artmcnl . Wasliiiitrloii. 
1>. C. 

Claims lioanl. Constnietictn Division, War De|ianmeni, WasliiiiKtoii. D. C. 

Claims Moanl. Simial Corps. War I >ei)artmeiii. Wasliiii;xl<>ii. D. C. 

Claims Hoartl. oflice Cliief of En^riiieers, War n<-itarlmenl. Wasliiii^ton. D. «'. 

Claims Hoard. Direetor of Pnnhase. War Depai-tmeiit, WaKliiimtim. D. C. 

Traiisportalioii Service Claims Hoard. War Depiirtmeiit. Waslnnsrton. I). C. 

I'.oard of Uc\ iew for Medical and llosjiital .Sii)tplies I»ivision. War I">epurt- 
m<ni. Washinjitoii. D. c. 

Hoard of Keview for .Macliiiicry and Kimiiiceriiii: Materials Division. War 
1 ><'l arfmoul. Washington. D. C. 

Hoard of Keview for Molois and Veliiclc< l>ivisioii. War I >cp!"'"'"''"- W Msli- 
in;-'ton. D. C. 

l»isiiiJ( r AM> /,o^^: Hoahi>>. 

OKI>N.\N(K mSTHKT CLAIMS HOAKUS. 

Haltimori'. I'ark I'laiU. Colnmbia Avenue, Baltimore. .Md. 
Bridgeport. 04'i Main Streel. Bridp-port, Conn. 
Boston, in Portland Street. Boston, Ma.ss. 
Cliicatro, 1").") East Superior Street. Chicago. III. 
Cincinnati, corner Third and Vine Streets. Cinciiiiiai i. <>liio. 
Cleveland. ri.Niiioulli r.uildiiig. Cleveland. ( Miio. 
Detroit. 35 Washington Boulevard. Ih'troit. .Mich. 

New Voik. .Mheiiiarle Building, Twent.v-fourth Street ami P.roadwa.v. New- 
York Cit.v. 

Philadelphia. 1710 Market Street, Philadelphia, Pa. 
Pittsburgh. Chiimher of Commerce Building, Pittslnngh. i*a. 
Rochester. 8-J St. Paul Street. Rochester, X. Y. 
St. Louis, Missouri State Life P.tiilding. St. Louis, Mo. 
Toronto, 0(m; Royal Hank Building. Toronto. Canada. 

<HF.>[tCAI. WAKKAKK SKRVICK. 

Boartl of "Review, Ga.s Defense. Edgewood Arsenal. 

ZONK lUtARKS Ol (ONTKACT RKVtKW. OFKICK OK THK lltRKCTOU OK IM;KrllASK A\l» 

.STORAGK. 

Zone No. ]. Boston. Mass., 108 .Massachusetts Avenue. 

Zone No. 2. New York City, 4CA Eighth Avenue. 

Zone No. :^. Philadelphia. Pa.. Twenty-first and Oregon Avenue. 

Zone No. 4, P.altimore. Md., Coca-Cola Building. 

Zone No. ">, Atlanta. Ga.. Transportation Building. 

Zone No. G, J'effersonville. Ind.. Meigs Avenue. 



20 JURISDICTION OF THE SECRETARY OF AVAR. 

Zdiie No. 7, Chicago. 111., 1819 West Thirty-ninth Street. 

Zone No. 8. St. Louis, Mo., Second and Arsenal Streets. 

Zone No. 9, New Orleans, La., Audubon Building. 

Zones No. 10 and No. 12, San Antonio, Tex., (Joneral Suppl.v r)ei)ot. 

Zone No. 11, Omaha. Nebr.. Army Building. 

Zone No. 13. San Francisco, Calif., Fort Mason. 

Zone No, 14, Wa.shington, D. C, Seventeenth and V ^ftreets NW. 

IIIK DlsriiH T OhFICKiS OK .Ml! SKKVICK FIXANCK, 

]Mr. W. Ct. P'arnsworth, Disti-ict Finance Manager, New York, N. Y.. 360 
Madison Aveime, Abercronibie iV: Fitch Building, Ninth Flooi-. 

4. The Jurisdiction of the Board of Contract Adjustment Is From Several 

Sources. 

(a) On formal contracts. 

General Orders, Xo. 103, of November 6. 1918, in creating the board 
of contract adjustment, described its jurisdiction in the words: 

It shall be the duty of the board to hear and determine all claims, doubt.s, 
or disputes, including all questions of performance or nonperformance, which 
may arise under any contract made by the War Department. 

This language would, on its face, seem to cover all contracts made 
by the War Department, whether .formally executed or not. How- 
ever, as there seems some doubt whether the Secretary of War may 
settle a claim on an unauthorized, informally executed contract, 
except for work or property had and received by the United States, 
this clause has usually been construed to give jurisdiction only where 
the contracts were executed in accordance Avith No. 3744, Revised 
Statutes, or where informal contracts are authorized by law, such as 
the informal contracts of the Ordnance or of the Quartermaster for 
performance within 60 days, or involving amounts less than $500 
(Comp. Stat.. G854, 6853b). This jurisdiction is not confined to 
claims arising out of terminated contracts but relates to claims aris- 
ing out of contracts during their performance, such as matters of 
construction of contracis, etc. It has been shown that the jurisdic- 
tion of the Secretary of War to adjust unliquidated damages arising 
under formal contracts rests upon either the agreement of the parties 
as expressed in the original contract, or upon the power to make 
supplemental contracts. Such supplemental contracts may modify 
or terminate the original contract. In so doing he may adjust mat- 
ters of unliquidated damages arising during the performance of the 
original contract. These contracts would, hoAvever. be iuA'alid where 
they Avere not in the interest of the United States. The board may, 
therefore, for example, adjust claims groAving out of a desire of 
the Secretary of War to curtail a contract, leaving part only to be 
performed, and in fixing the amount to be paid under the supple- 
mental contract for such curtailment may include matters of un- 
liquidated damages arising out of the failure of the United States 
or of the contractor to comply Avith the details of the contract, thus 
causing the other party losses, and for which one of the parties 
might elect to consider the contract as having been breached and to 
absolve him from further performance but for the making of the 
supplemental contract. 



JURISDICTION OF THE SECRETARY OF WAR. 21 

III iiiaiiy ciises donltts or <li.si)iitt'> arc to !»•' tlcti'iiiiiiu'tl iiiuK-i' llu* 
terms of the oiiirinal cniitracts thcinsclvos hy some orticci- or lioard 
or hv ailiitiation. Jii tlu'se eases, the Secretary of War lia\'iii<; so 
agreed will, as a rule, use such method of adjustment and the matter 
may only come before the hoai'd of contract adjustment for construc- 
tion of the clauses for arbitration or perhaps on review. 

It would seem that one of the princi]ial causes for the is>ue of 
(reneral Orders, No. lOH, was to establish a lioai'd for such arbitra- 
tioJis and in accordance with tlu' clauses pi-escrii)ed in Supi)ly Cir- 
cular Xo. 88 to l)e inserted in War Depaitment contr^ct^. ( For 
copy of those clnu>es see Tnfoiniation Circuhn- Xo. 1.) 

The jurisdiction of this board is not final under (ieneral Orders, 
No. 103, ^vhich further ])rovide8, "The findings and decisions of the 
board shall be final and conclusive, subject only to review i)v the 
Secretary of War.'' The simple procedure laid down for presenta- 
tion to the board of these cases is to l)e found in Information Cii- 
cular Xo. 1 heiewith. 

In addition to this oi'iirinal jurisdiction under i'oiiual contracts, 
the board of contract adjustment has an appellate jurisdiction, as 
outlined above, to i-eview. at the instance of the contractor, the terms 
of the projjosed settlement contracts for the curtailment of produc- 
tion and reimbuisement and comjiensation to the contractor for what 
he has done with reference to the eliminated i)ortion of his contract. 
This jurisdiction was definitelv confirmecl bv Supplv Circidar No. 
IH. dated July 11, 1010. 

The ])iactice for appeal> in thex' and (crtain other case> is also 
set forth in Su|)ply Cii-cular Xo. 4<>, her to attaclu'd. On su; h ap- 
peal this board i- not confined to the grounds stated for appeal or 
review, but may con-idcr tlu' iMitire case. 

(A) On infoiiiial rontiact-. 

As stated above, the jurixlit tion of the Secietary of War to ^^ettle 
claims on the termination or curtailment of informal executory 
lonti-act- i> doulitful. While he may in such case pay for services 
rendeicd and accepted, and for property had and re. eived, liis 
jxtwcTs seem limited to payments on such implied <ontract^. Il 
would seem that these are not within the prohibition of K. S. .'»7U. 
(Ignited States r. Andres & Co., 207 U. S., 220). He may not, how- 
ever, under such contracts, make binding sui)i)lemi'ntal contracts ex- 
tending to the payments for other items, as, for example, work in 
i:)ro(ess and unliiiuidated damages, etc. To <'over tl\is the act of 
Marcli 2, 1010. was passed, and followed by (ieneral Orders Xo. 40. of 
March 10, 1010. which established the' War Department Claiui> 
Board as the agency witliin the T'nited States "thi'ough which >ha!l 
be exerci.sed in the name of the Secretary of War and by his author- 
ity all powers and duties conferred u])on the .Sci ivtaiy of Wav \iy 
the act of Congress " of March 2, and further provided that, 
"for the expeditious ]),rformance of its duties the Wai- Department 
Claims lioard is authorized to make such use a^ it may find desir- 
able of the Board of Contract Adjustment, the War Department 
Board of Ap])raisers, and any othei- agency or agencies of the War 
Department." 



22 JURiSDicTioisr or the secretary of war. 

The. Director of Purchase. Storage and Traffic then issued for 
the War Department Chiims Board, Snpplj^ Cir: uhir No. 17. re- 
vised, dated March 3, 1919, in which it was provided: 

5. Procediu-e by the Board of Conti-acr Ailjustmeiit on Class V> claims: 

(a) Class B claims shall he suhmitted to the Board of Contract Adjustment, 
which, in handlings them, will follow the procedure above outlined for Class A 
flaims so far as it is applicable: but these claims which are based upon 
alleged agreements entered into with an officer or agent acting mider the 
authority, directi«in, or instruction of the Secretary of War shall be kept 
separate and given mnnbers of a different series from those entered into by 
an officer or agent acting under the authority, direction, or instruction of the 
President, and the forms of award used by the Board of Contract Adjustment 
shall provide for signature by that board and approval by the War Department 
Clainjs Board. 

(i^^) The Board of (.'ontract Adjustment will establish, mider the direction 
of the War Department Claims Board, procedure for the proof of claims pend- 
ing before it. 

(c) The Board of Contract Adjustment may, in any case wiiei-e tlie nature, 
terms, and conditions of the agreement have been established and certified 
by it, refei" the claim to the ai)propriate biu'eau claims board for action and 
for re<-onnnendation of a fair and equitable basis upon which the agreement 
.should be adjusted, paid, or discharged, and the bureau claims board shall 
then proceed in the niamiei- provided in subsections d, c. /, and r/, of section 
8 liereof. and in the following general i)rovisions. 

7. In the event that the claimant is not willing to accept a finding made or 
an award reconnnended by a biuvau claims board, he n\ay appeal to the 
Board of (-ontract Adjustment. 

It will be noted that under this circular the Board of Contract 
Adjustment was given jurisdiction in three classes of cases: 

1. The detenu inaticm of all claims on infornuil, oral, or implied 
contracts of the War Department. These are connuonly known 
as Cla,ss B claims for the reason that the form of proof of contract 
set forth in Supply Circular No. 17 for use in such cases is desig- 
nated Form B. It is usual in these cases for the Board of Contract 
Adjustment to determine merely Avhat the nature, terms, and con- 
ditions of the contract were, if any ; and to attach and execute the 
Certificate C, called for by Supply Circular No. 17. The record is 
then transmitted to the bui-eau or department of the War Depart- 
ment from which the claim originated for settlement and payment. 
Since the issue of Supply Circular No. 17, the War Department 
Claims Board has, by its resolutions, taken two classes of such cases 
from this board, as follows: 

(a) All Class B claims arising "from agreements covering the acqinsition 
of lands or the use thereof or for damage resulting from notice by the 
Government of its intention to acquire or use such lands" are to be submitted 
to the War Depaitment board of apprai- ers for investigation and recommenda- 
tion in the same maimer as Class B claims submitted to the Board of (Con- 
tract Adjustment. (Minutes of meeting No. 2o of the War I>epartnient Claims 
Board, held Mar. IS. 1919.) 

(h) The Transportation Service claims board is directed to assume 

jurisdiction of ; the adjustment and settlement of all ■ Class B 

claims that may arise or have ari.sen out of the operatioi\s of the Transporta- 
tion Service; and is hereby vested with all the powers in re- 
spect to such claims that the provisions of Purchase, Storage, and Traffic 
Supply Circular No. 17, revised, 1919, have made applicable to the Board 
of Contract Adjustment. (Minutes of meeting No. 48 of War Department 
Claims Board, held May 23, 1919.) 

2. The determination of all claims on informal eontrticts made by 
the President or liis representatives other than the AVar Depart- 
ment for purposes connected with the prosecution of the war. As 



.1 iiusDK Tlox or riii; skcrktahv <»f wai;. 23 

t(» thc-t' -t'tlli'iiii'iil-- it will Itccoiiii' iu'ci'.-«>:iiy in many (•a^c'^ for tlii< 
hoard to make a conipU'tc (U'tennination and adjustment of the 
claims bt'causi' the aj^encies of tlui (lovermnent liiat madi' tlic con- 
tracts liavo no claims settlement orjranizatious. 

',\. Appeals and ([uestions presi-nted for re\ it'W from the vaiions 
bureaus and department hoards of the War Department. Thes(> 
appeals and icMpiots for review oi" suhmissioiis of (|Uestions in doui)l 
are similar to those mad<> in cases arisinjr uniler formal conti-acts. 
But in these cases (|uestions also aris*' under CMass A infoi'mal con- 
tracts ri'latinjj: to a determination of theii' nature, terms, and con- 
ditions. The procedure on such appeaU and in other cases is set 
forth in Su[)ply C'iicular No. f(>. This board may. in case of anv 
appeal, icxiew not only the (piestions s|)eciHcally presented but may 
.also <^t> into tin' whole case. 

John Kuss 1)ki.ahki.1). 
('nloiii'] (Ji(hunicc I >c I'd if m^ tit, 
(' lidiiiniui Boon! of Contiuict Adjustimnt. 

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